Question

Herbert Simon was a student of administrative behavior, and his studies eventually led to the discrediting of theories of purely rational decision-making. Rational decision-making implies a zero-sum game when considering budgets – that is, there is a certain amount of money each year, and the budget authority considers the needs of each budget area independently of last year’s budgets. Money assigned to one area is necessarily balanced by the loss of that money to another.

a. What did Simon notice about the next year’s budget requests in relation to the previous year's budgets that undermined the concept of rational, zero-sum budgeting? Briefly explain your answer.

b. What did Simon propose as a more realistic concept to explain the behavior of decision-making? Name the concept and explain the limitations and constraints that humans face when making decisions.

Answer 1

(A)Herbert Simon observed that the next year’s budget requests weren’t independent of the previous year’s budgets. He noticed a pattern where budget requests for each area were influenced by the budgets allocated in the previous years. This undermined the concept of rational, zero-sum budgeting by revealing that decisions regarding budget allocations weren’t made in isolation for each area but were interconnected and influenced by historical budgeting patterns. Budgets weren’t approached as independent entities but rather influenced by past allocations and historical trends, thereby challenging the notion of zero-sum budgeting. (B) Simon proposed the concept of “bounded rationality” as a more realistic concept to explain decision-making. Bounded rationality acknowledges that humans face limitations and constraints when making decisions. It recognizes that decision-makers often have limited information, cognitive abilities, and time to analyze all available options comprehensively. Therefore, instead of maximizing utility through entirely rational processes (as assumed in traditional economic theory), decision-makers aim for a satisfactory or acceptable solution given the constraints they face. This concept acknowledges that decision-making isn’t always perfectly rational due to human limitations, cognitive biases, and the complexity of real-world situations.